Natural gas is seen as an attractive source of energy – it is cleaner than coal and often more reliable. But there are potential risks from the drilling and hydraulic fracturing process. This column shows how shale gas extraction could reduce property prices, and argues that policymakers need to bear this in mind when thinking about the costs and benefits.

A recent increase in the extraction of natural gas and oil using unconventional methods has transformed communities and landscapes. Shale gas extraction has grown rapidly in recent years thanks to developments in hydraulic fracturing and horizontal drilling. The extraction of natural gas from shale, which had hitherto been economically unrecoverable, has resulted in greatly expanded supply and in many landowners receiving high resource rents for the hydrocarbons beneath their land.

Natural gas provides an attractive source of energy, emitting fewer pollutants than coal upon combustion and coming from reliable domestic sources. There are, however, potential risks that accompany the drilling and hydraulic fracturing process. The processes required to develop and produce natural gas from shale rock use a great deal of water, injected along with a collection of chemicals deep into the ground at high pressure. Compared with conventional natural gas development, this may result in greater risk to air, water, and health. Regarding housing markets and local tax revenues, the environmental impact of shale gas development and the perception of the risks associated with these processes, as well as increased truck traffic or the visual burden of a well pad, could depress property values.

The academic literature describing the costs of proximity to oil and gas drilling operations on property values is very limited. Boxall et al. (2005) examine the property value impacts of exposure to sour gas wells and flaring oil batteries in Central Alberta, Canada. The authors find significant evidence of small (i.e., 3-4%) but significant reductions in property values associated with proximity to a well. The impact of shale gas development on groundwater contamination has been explored in more detail: faulty well casings or cement could provide a pathway for contaminants to reach a drinking water aquifer (SEAB 2011, Osborn et al. 2011). Other problems may arise if hydraulic fracturing occurs too close to a drinking water aquifer (EPA 2011) or if there are naturally occurring hydraulic pathways between the formation and the drinking water aquifer (Warner et al. 2012, Myers 2012). However, there is also evidence that natural gas development creates jobs and generates income for local residents (Weber 2011, Marchand 2011). Upon signing their mineral rights to a gas company, landowners may receive two dollars to thousands of dollars per acre as an upfront ‘bonus’ payment, an annual land rental fee and a 12.5% to 21% royalty per unit of gas extracted1.

There are both positive and negative aspects of shale gas development; property values may rise in the face of a local economic boom and lease payments to landowners, or decrease when faced with negative externalities and the risk of groundwater contamination. Focusing on the concern over groundwater contamination, we examine whether properties that depend on groundwater are differentially affected when a shale gas well is drilled nearby. We then estimate the negative capitalisation of the risk of groundwater contamination (either perceived or real) into the value of groundwater dependent homes.

A difficulty with estimating the impact of proximity to shale gas wells on property values is the presence of unobservable attributes correlated with proximity. For example, homes located near shale gas wells may be systematically better or worse (in terms of unobservables) than homes located farther from wells. There may also be time-varying unobservables that are correlated with proximity: if shale development creates a local economic boom, then proximity will be correlated with increased economic activity and higher property values. However, these correlations do not imply causality, and it is important to control for them when estimating the impact of groundwater contamination risk on property values. We approach this issue by implementing a triple difference estimator, or a difference-in-difference-in-differences (DDD) estimator, where we define a pair of overlapping treatment and control groups of properties by exploiting a property’s proximity to wells and whether or not it is located in the public water service area (PWSA). This allows us to identify the capitalisation of groundwater risk on groundwater-dependent homes, as well as the impact on property values for homes that receive piped drinking water. Finally, we also consider differences across prices associated with multiple transactions at each property. This allows us to control non-parametrically for anything unobserved about the house or its neighbourhood that does not vary over time.

Figure 1. Washington County, PA

Our area of focus is Washington County, Pennsylvania, located in the southwestern corner of the state. Figure 1 describes Washington County, with the piped water service area (PWSA) highlighted in light blue. We exploit the data in the 1 km area on either side of the PWSA border (highlighted in dark blue and yellow), as homes on either side are more similar in unobservable ways than homes farther from the border, yet the presence of the border still allows us to compare groundwater versus piped water-dependent households. Along with the differencing strategies described above, this sample cut allows us to capture the time-varying unobservables that may be correlated with proximity.

Though we do not have information on mineral rights lease payments to homeowners2, we assume that all properties (conditional upon proximity to a drilled well and other observables such as lot size) have an equal likelihood of receiving lease payments regardless of water service area3. While both groundwater and PWSA houses may see their prices go up because of mineral rights and increased economic activity, properties that rely on groundwater may see their values increase by less (or even decrease) given concerns of groundwater contamination from nearby shale gas development. Our overlapping treatment and control groups based on well proximity and water source provide us with a two-part quasi-experiment with which we can tease out the negative impact of groundwater contamination from the positive impact of the mineral lease payments and local economic activity.

We find that properties in the PWSA positively capitalise proximity to a well pad by 10.7%, and this result is statistically significant. This is most likely due to lease payments, which allow properties in the PWSA to increase their values while avoiding the risks (or perceived risks) of contaminated groundwater. For properties that depend on groundwater, however, the estimate of the effect of drilling a well pad within 2000 meters implies a decrease in property values of 23.6%. Their difference (-12.9%) while not itself statistically significant4, suggests that, in contrast to PWSA homes, prices of groundwater-dependent properties certainly do not rise as a result of nearby drilling, and may fall because of groundwater contamination risk.

The policy implications of these results may be substantial. To the extent that the net effect of drilling on groundwater-dependent properties could be negative, one might expect to see an increase in the likelihood of foreclosure in areas experiencing rapid growth of hydraulic fracturing. The US government acknowledged the possible negative consequences of allowing leasing on mortgaged land when, in March 2012, it began discussing a regulation requiring an environmental review of any property with an oil and gas lease before issuing a mortgage5. However, this proposed regulation was rejected within a week6. These results imply that there may be substantial value from extending piped water networks into drilling areas dependent on groundwater, and suggest that costly regulation to reduce the likelihood of groundwater contamination may be justified purely on the basis of improving property tax revenues. The overall lack of research regarding the impacts on property values from proximity to shale gas wells hinders the ability of the government to regulate optimally, both at the national and local levels. Our research helps to fill that void.

2 Mineral leases are filed at the county courthouse however not in an electronic format. While some leases have been scanned and are available in pdf format at www.landex.com, this service is geared more towards viewing a handful of leases; downloading all leases in a county would be expensive and matching the leases to properties via an address or tax parcel number would likely be an imprecise endeavour.

3 It could be the case that, given groundwater safety concerns, individuals in groundwater areas are less likely to sign a mineral lease, in which case we would overestimate the negative impact of a well in a groundwater area if fewer groundwater dependent homes are receiving lease payments. Our results would thus be interpreted as an upper bound on the negative impact of proximity for groundwater dependent homes. However, gas exploration and production companies will only drill after obtaining the mineral rights to a sufficiently large area to warrant drilling, implying that holdouts are the minority in areas where wells have been drilled. Furthermore, property owners unwilling to sign based on groundwater contamination concerns are likely rare; if others nearby have granted their mineral rights, groundwater contamination is not prevented by not signing.